If you're looking for both income and growth, here are three great ways to get it.
When it comes to income investing, there are many index funds to choose from and a wide range of risks, yields, and upside potential to consider. With that in mind, here are three excellent Vanguard exchange-traded funds (ETFs) focused on dividend investing, but with three very different approaches.
The Vanguard Dividend Appreciation ETF (VIG 0.64%) is the largest ETF of the three discussed here in terms of total fund assets. It is also the cheapest to invest in, with a rock-bottom 0.06% expense ratio.
On the other hand, with a 1.8% yield, it is also the lowest-paying dividend ETF on the list. However, it would be a mistake for investors to dismiss it simply because of its relatively low yield.
Here's why. Instead of focusing on stocks with the highest dividend yields, the Vanguard Dividend Appreciation ETF invests in stocks with strong records of growing their dividends every year. In other words, the focus isn't on current income -- the goal is to find stocks whose income will grow significantly every year.
Top holdings include Apple, Broadcom, Microsoft, JPMorgan Chase, and ExxonMobil. All of these companies have lots of growth potential. In a nutshell, the goal isn't to create a current income stream but rather an income stream that will grow rapidly over time.
Many income investors often think of real estate investment trusts, or REITs, as boring income investments. However, the reality is that REITs offer a high level of income and significant upside potential over time. In fact, many of the leading REITs have handily beaten the S&P 500's total returns over the past few decades.
The Vanguard Real Estate ETF (VNQ 1.04%) allows investors to get exposure to a diversified portfolio of REITs in a single investment and has a low 0.13% expense ratio. The ETF currently has 155 stocks in its portfolio, with top holdings that include Prologis, American Tower, Equinix, and Welltower.
Not only do REITs have excellent total return potential, but they can also be big beneficiaries of falling interest rates. So, now could be an excellent time to add this ETF to your portfolio. The fund has a 3.7% dividend yield, and real estate could be a great way to add some diversification from traditional stock index funds.
One unique approach to generating income is to focus on opportunities outside the U.S., and dividend investors can do that with the Vanguard International High Dividend Yield ETF (VYMI 0.39%).
As the name implies, this ETF tracks an index of international stocks that pay above-average dividend yields. About 45% of the fund's holdings are based in Europe, with 34% coming from other developed countries and 21% from emerging markets. You're probably familiar with some of the fund's top holdings, including Nestle, Shell, Toyota, and Novartis, just to name a few.
As of this writing, the Vanguard International High Dividend Yield ETF has a 4.5% yield, and the ETF itself looks very cheap. The average stock in the index trades for just 11 times earnings and 1.4 times book value (compared with 4.7 times for the average S&P 500 stock).
While I don't think income-seeking investors would go wrong with any (or all) of these ETFs, the best choice for you depends on your specific investment goals and income expectations. For example, an investor who still has decades to retirement might be best suited for a growth-focused ETF like the Vanguard Dividend Appreciation ETF, while a retiree who relies on their portfolio for current income might prefer the Vanguard Real Estate ETF.